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From the worst economic slowdown in decades to the profound uncertainty posed by trade and technology conflicts with the United States, the Chinese economy is running into some of the most difficult challenges since the global financial crisis. Whether China will adopt a more expansionary policy to stimulate the economy has therefore attracted widespread attention. The latest signals indicate that despite all these headwinds, a rise in bond defaults, and growth coming in at the lowest levels in decades, a full-blown stimulus is probably off the table. Given China's already unsustainable debt levels, this might be good news for financial stability, even if it means the slowdown continues into 2020.
The Communist Party leadership decides on its economic policy stance for the forthcoming year at its annual Central Economic Work Conference (CEWC). As usual, the readout for this year's conference, held on December 10–12, 2019, in Beijing, does not include numerical targets for key economic indicators, but it does send early signals about China's 2020 economic policy. Here are three things you need to know from our interpretation of the CEWC readout.
First, on fiscal policy, no additional tax cut seems to be in sight for 2020. The conference calls for "proactive fiscal policy" just as it did in 2018, but instead of last year's call to "implement larger scale tax and fee cuts," it is now calling for better implementation of the cuts introduced in early 2019. In the meantime, general government expenditures will decrease to make room for spending on the social safety net, a shift that may be due to pressures on government finances and that partially mitigates the expansionary impact of any tax cuts. A proactive fiscal policy in 2020 will therefore focus on optimizing government spending.
Second, on monetary policy, countercyclical measures will continue, but likely without any deluge of monetary stimulus. The calls to reduce financing costs were also repeated from last year. The People's Bank of China has already taken action since the CEWC, cutting banks' reserve requirements by 50 basis points effective January 6, 2020.1 More cuts and/or continued window guidance that pushes the big banks to cut interest rates for private and micro and small-sized borrowers could be in the cards. But the CEWC isn't signaling any aggressive credit-fueled stimulus. This stance is also in line with the central bank governor's recent call to avoid overusing monetary policy to stimulate the economy.
Third, on debt, while China's leadership seems to be less worried about financial risks, it remains cautious over credit growth in the economy. One most noteworthy change in this year's CEWC readout is that systemic financial risk is now a reduced priority. Since the concept of "three critical battles" for Chinese policymakers was first raised in 2017, the battle against financial risks was always listed as the first and most urgent—ahead of the other two against poverty and pollution. But financial risk is now placed last, based on the leadership's judgement that China's financial system is generally healthy.
On the other hand, financial stability remains a critical issue—especially for China's often weak, smaller banks. The CEWC calls for a "fundamentally stable macro leverage ratio," meaning that credit should grow approximately in line with the economy. Since the economy is cooling down, credit growth that has already been slowing will likely keep falling. Though policymakers have made progress in cracking down on risky shadow banking, they remain cautious.
Overall, the CEWC for 2020 put the emphasis on steady countercyclical adjustments, dampening any prospect for stronger stimulus.2
Notes
1. While the reserve reduction should free up RMB 800 billion for banks to lend, any stimulative effect will be limited, if not entirely cancelled out, by the cash crunch that always hits China's financial system before the annual Spring Festival (which falls during January 24–30 this year).
2. The Chinese character for "stability" or "steady" (稳) appears 29 times in the CEWC readout, compared to 22 mentions in 2018.
